Bitcoin is currently completing a 50% drop from the last record it set in November last year. Many see this decline as proof that Crypto is a scam, the biggest scam in financial history. Well, is it so? Or might it be that people don’t understand the nature of the asset?
Bitcoin, after all, is a speculative risk asset, and in many countries, the authorities have even issued a special warning about investing in it and in cryptocurrencies in general. However, some countries are looking to adopt crypto assets and regulate this market.
Understanding The nature of the Asset
Unlike fiat currencies, such as Euros and Dollars, it does not enjoy the support of a central bank or national government. It has no utilitarian use in the industry and it does not generate income. Bitcoin has an intrinsic value, derived from a combination of its rarity and its usefulness.
The rarity of Bitcoin is reflected in its design. Bitcoin was designed with a rigid “ceiling” of 21 million coins. There is no central entity that can change this ceiling unilaterally.
Even Satoshi Nakamoto himself, if he is still alive, cannot at this point add new coins to the protocol. 18.5 Coin Dictionary has already been mined. Millions of coins have been stolen or lost forever. The rarity here is a fundamental characteristic.
Bitcoin is a Rare Asset
Gold is one of the rarest metals, and Bitcoin is rare compared to other cryptocurrencies. Each cryptocurrency is rare on its own, but there is not a shred of a rarity in the number of cryptocurrencies that exist now or in the future. In other words, the rarity of Bitcoin is at risk – hence its value.
In addition, Bitcoin has an automated and pre-planned mechanism known as halving: once every four years or so, the new amount of bitcoin generated once every ten minutes is cut in half.
Thus, in January 2009 Bitcoin miners were rewarded with 50 bitcoins every ten minutes for each new block of transactions they added to the blockchain. In 2012, the reward was 25 bitcoins; In 2016 – the reward was 12.5 bitcoin, while in 2020 and as of today, the reward is 6.25 bitcoin every 10 minutes.
Crossing events reduce the supply of new Bitcoin coins. This means that as long as there is a relatively fixed user base that provides demand for the currency, the reduction in supply following the crossing event is expected to raise the price of the currency.
This, at least, has happened in the four crossing cycles so far. Bitcoin, therefore, is rare both in terms of current quantity and in terms of the declining rate of formation of new currencies. This rarity is one of the basics of the intrinsic value of Bitcoin.
Bitcoin As an Investment
The fact that a particular asset has value and future potential, does not automatically give it a place in our investment portfolio.
Is it possible to theoretically justify a combination of Bitcoin in an investment portfolio? One can think of several main reasons for doing so.
No one knows if Bitcoin will continue to climb as in the past, it is a scenario that cannot be ruled out, given the characteristics of limited supply on the ceiling, a built-in deflationary mechanism, and growing demand for third-world assets.
The dynamics of constant / rising demand and the declining supply support the claim that the price of bitcoin will continue to rise.
Bitcoin As a Generator of Yield
In the long run, Bitcoin may improve the return that a distributed investment portfolio will yield, even if the exposure rate is very measured. The purpose of any investment portfolio is to grow. Ideally, we would like to incorporate assets whose value tends to increase over time.
Bitcoin certainly meets this definition, at least in terms of its historical performance. The price of this thing has been flying, for over a decade, by hundreds of percent.
Bitcoin is mostly correlated to its “crossing” cycles. Typically, the bullish market in Bitcoin starts after each such crossing, followed by a sharp fall.